978-1118334324 Chapter 5 Lecture Note Part 2

ACCOUNTING ACROSS THE ORGANIZATION

Costco Wholesale Corp. has always had a generous return policy, but adopted a

new policy requiring that certain electronics be returned within 90 days of their

recognition?

Answer: If a company expects significant returns, it should make an adjusting

entry at the end of the year reducing sales by the estimated amount of

revenue recognized in the period.

C. Adjusting Entries.

2. At the end of each period, for control purposes, a merchandising company

3. The company may need to adjust the perpetual inventory records to make

the recorded inventory amount agree with the inventory on hand. This involves

debiting (or crediting) Inventory and crediting (or debiting) Cost of Goods

Sold.

D. Closing Entries.

1. The temporary accounts with credit balances are closed to Income Summary.

Summary.

3. Income Summary is closed to the Retained Earnings account.

4. The Dividends account is closed to the Retianed Earnings account.

E. Forms of Income Statements.

Merchandising companies use one of two forms for the income statement:

1. Multiple-step income statement.

other expenses and losses.

2. The multiple-step income statement reports gross profit (net sales less

cost of goods sold).

the gross profit rate.

b. The gross profit rate is computed by dividing the gross profit amount by

net sales.

the gross profit amount.

3. Single-step income statement.

a. All data are classified into two categories:

and gains.

(2) Expenses include cost of goods sold, operating expenses, and

other expenses and losses.

*F. Using a Worksheet.

column to the balance sheet debit column.

3. Sales Revenue, Sales Returns and Allowances, and Sales Discounts are

column.

4. Cost of Goods Sold is extended from the adjusted trial balance column

to the income statement debit column.

*G. Determining Cost of Goods Sold Under a Periodic System.

1. Determining cost of goods sold is different under the periodic system

than under the perpetual system.

2. Under a periodic system, the company uses separate accounts to record

freight costs, returns, and discounts.

3. At the end of the period, a company calculates the balance in ending

inventory, and cost of goods sold for the period.

4. The steps in determining cost of goods sold are:

a. Record the purchases of merchandise.

b. Determine the cost of goods purchased: Purchases less purchase

returns and allowances and purchase discounts plus freight-in.

c. Determine the cost of goods on hand at the beginning and end of the

accounting period.

*H. Periodic Inventory System.

1. Companies record revenues from the sale of merchandise when sales

are made, just as in a perpetual system. But companies do not attempt

on the date of sale to record the cost of the merchandise sold.

2. Companies record purchases of merchandise in the Purchases account

rather than the Inventory account.

3. Freight costs are recorded in a Freight-In account which is a temporary

account whose normal balance is a debit.

4. When a purchaser returns merchandise for credit or receives a discount

for prompt payment, it is called purchase returns and allowances or pur–

chase discounts. Purchase Returns and Allowances and Purchase Discounts

A Look at IFRS

KEY POINTS

 Under both GAAP and IFRS, a company can choose to use either a

perpetual or a periodic system.

providing of services.

 Under GAAP, companies generally classify income statement items by

function. Classification by function leads to descriptions like administration,

distribution, and manufacturing. Under IFRS, companies must classify

expenses by either nature or function. Classification by nature leads to

financial statements.

 Presentation of the income statement under GAAP follows either a single–

step or multiple-step format. IFRS does not mention a single-step or

multiple-step approach.

 Under IFRS, revaluation of land, buildings, and intangible assets is

income.

 IAS 1, “Presentation of Financial Statements,” provides general guidelines

for the reporting of income statement information. Subsequently, a number

of international standards have been issued that provide additional

guidance to issues related to income statement presentation.

 Similar to GAAP, comprehensive income under IFRS includes unrealized

gains and losses (such as those on so–called “non-trading securities”) that

are not included in the calculation of net income.

 IFRS requires that two years of income statement information be

presented, whereas GAAP requires three years.

LOOKING TO THE FUTURE

cash flows (operating, investing, and financing), so that numbers can be more

readily traced across statements. For example, the amount of income that is

generated by operations would be traceable to the assets and liabilities used to

generate the income. Finally, this approach would also provide detail, beyond

analysts.

20 MINUTE QUIZ

Circle the correct answer.

True/False

1. Measuring net income for a merchandising company is conceptually the same as for

a service company.

True False

a perpetual inventory system.

True False

3. Under the perpetual inventory system, the purchase of merchandise is recorded with a debit

to the Purchases account.

True False

5. A customer may receive a sales discount for goods that are damaged or defective.

True False

6. In a single-step income statement, gross profit and operating income are shown on the

income statement.

True False

7. In the balance sheet, inventory is reported as a current asset immediately below

accounts receivable.

True False

8. Income from operations is determined by subtracting other expenses and losses from

gross profit.

True False

9. Merchandising companies report nonoperating activities in the income statement imme–

diately after the company’s primary operating activities.

True False

*10. In preparing a worksheet for a merchandising firm, all income statement column debits

represent expenses.

True False

Multiple Choice

1. Sales Discounts

a. is a contra revenue account.

b. has a normal debit balance.

c. appears on the income statement.

d. All of these answers are correct.

3. The recording of a sale requires a

a. credit to a sales account and a debit to an asset account.

b. debit to Cash and a credit to Owner’s Capital.

4. Which of the following would not be considered an operating expense?

a. Cost of goods sold

b. Rent expense

c. Freight-out

d. Office expense

a. Gross profit

b. Income from operations

c. Other revenues and gains

d. Net sales

ANSWERS TO QUIZ

True/False

Multiple Choice